Abount three years ago, I realized an unprecedented amount of debt had been financed or refinanced in the prior five years. The terms and amounts that were crossing my desk were unbelievable. It was as if the banking system was throwing money at people and never cared whether it could ever be paid back.
Based on simple calculations, it appears that $25-$35 trillion dollars was financed or refinanced in the last eight years including Federal Debt, Municipal Debt, Mortgages, CRE loans, Credit Cards, commercial loans, Auto Loans, Home Equity Loans, etc....
THAT IS MORE THAN ALL OF THE OUTSTANDING DEBT OF THE PRIOR 200 YEARS.
Much of that debt was incurred between 2003 and 2007. A time when the economy boomed and the stock market followed. Due to the booming economy, tax receipts exploded and so did government spending. Instead of taking the windfall and paying down debt, we doubled the size of government between 2000 and 2008.
If we were doubling the size of government from a small base it would be one thing, but we doubled government AFTER it had morphed into a large percentage of our GDP. In addition, with money sloshing into government, huge increases in health care spending drove up the costs and also drove up the pricing to the private sector both in service rates and insurance rates.
Eventually the banks cut off credit and you have to ask where are we now?
1. A Nation where servicing the debt burden is simply too large for the GDP and now suffocating spending.
2. A Nation where the government budget is out of line with the current private economy now making up more than half of GDP.
3. A Nation where about 20% of the GDP is directed to health care.
4. A Nation where over 1/3 of its population is dependent on government spending to survive.
None of this was hard to see. If you want to bankrupt a person, just loan him more than he can afford to pay back. After he has fun spending the loaned money, you have a pretty good idea he will be broke. The same is true for an entire nation and it is now occuring before our eyes.
Tax receipts to NY are down about 25%.....CA is approaching the same. Incomes for many high income earners(those who pay the most taxes) are down 30, 40, 50% and more. Sales to many of our most important businesses are down similar percentages....AND THE REVENUE STREAMS ARE SHRINKING.
The problem is we have a government that has HUGE obligations. It owes large salaries to our politicians and government workers...large welfare and health care obligations....as well as large military spend obligations.
Between servicing interest and supporting government in its current form, we are looking at consuming most of our GDP before spending much on goods and services. Throw in health care and there is practically nothing left.
Remember, those people who work for the government, over 20,000,000, and the tens of millions who are dependent on government payments.....ALL OF THEIR SPEND FOR EVERYTHING IS DEPENDENT ON THE PRIVATE ECONOMY PAYING ENOUGH IN TAXES TO SUPPORT THEM.
What is so different now?
Up until about six months ago, our private economy was more or less generating enough income and taxes to support our growing government. Private earnings drove government spending which recycled back into the private economy driving even more earnings.
By infecting our private economy with so much debt, we have effectively suffocated it by forcing it to service an unsustainable debt burden. By suffocating the private economy, we are killing the tax base.
Many can't afford to pay property taxes, especially CRE projects, which is having a profound effect on state revenues......and based on the current outlook, the future is a lot worse because little is being done to reduce the debt burden on society.
The only ones being helped are the banks which in turn are increasing the burden on the private economy by tightening credit and RAISING INTEREST RATES.
By shutting down the private economy.....revenues are evaporating and a war of sorts is developing within our nation.
Government vs. The People. Both want to survive.....but there is not enough money to sustain both. Right now, government is surviving by borrowing trillions of dollars....going forward, the need to borrow is only going to increase because of rising obligations against a shrinking tax base. The problem is now there is no one left in the world with enough money to sustain our government's spending needs...except for one:
THE ASSETS OF THE AMERICAN PEOPLE
Government knows if it keeps printing at anything close to the current rate, the fallout will be much worse than the problem just avoided as Warren Buffett recently pointed out in the Times.
At this point, you can only manipulate earnings for so long before you run out of sales. You can only cut so far before there is nothing left to cut. We have been slashing and cutting for over two years and we are approaching the critical stage.
There is just one straw left holding this ship above water....government spending trillions it doesn't have. It is remarkable we are at this stage of distress and so few are publicly trying to deal with the issue. All Bernanke and Geithner can seem to do is create novel ways to funnel trillions to their banker buddies. Government just wants to spend more and the press seems to want to soothe the sheep.
Where does this go from now is anyone's guess....our nation is broke and few want to deal with it.....eventually, in one way or another it will deal with us.......the longer we wait, the more severe the consequences.....now the only question is how?
Worthless Currency, Depression, War, Pandemic.....you pick.....but the bankers will want to be paid.....it is just a question of when.